Organizations and Markets

Property Rights and Modularity

| Dick Langlois |

The Schumpeter Society conference in Aalborg has just ended, and I’m on the train to Copenhagen before heading home tomorrow. Like Peter, I was also at the ISNIE conference in Stirling. Of the three conferences I attended on this trip, ISNIE gets the award for best substance, something I judge by whether I learned something interesting that I hadn’t known. Great plenaries with Ostrom and Williamson, as well as Bruno Frey on the economics of happiness and Pablo Spiller on regulation. I hadn’t been familiar with Spiller’s concept of third-party opportunism in government contracting. Some of the parallel sessions were also good, including sessions involving always-reliable people like Lee Alston and Gary Libecap. But perhaps the most interesting papers I heard were by Henry Smith of Harvard Law School, whom I had never met before.

Smith has a modularity theory of property rights, one very much in line with my own thinking on the issue. As Smith writes in one of his papers given at the conference,

property sets up modular structures that manage the complexity of the interactions of actors with respect to resources. A starting point for property is to use an exclusion strategy to define the “thing” and then to delineate rights wholesale as a first cut through the interface between the bubble defined by the exclusion strategy and the rest of the world. Thus, . . . the interface between the basic package of rights to a car and the rest of the world is a simple one behind which much information is hidden. In this way, the structure of rights is modular. As a method of managing complexity modularity relies on a system’s being nearly decomposable, that is, one in which there are clusters of elements that interact relatively intensely with each other but which interact more sparsely with elements of other clusters.

This is a version of what lawyers call the in rem view. What I learned that I hadn’t known is that this is the polar opposite of Coase’s theory of property rights. It turns out that Coase is an extreme legal realist. That is, like legal realists, Coase thinks of property as a bundle of rights to do specific things — emit sparks, make noise, etc. The trouble with this view is that it is non-modular (more technically: non-decomposable) and creates a spaghetti-tangle of interactions among rights holders that raises transaction costs. The in rem view is perfectly consistent with Coasean bargaining, of course, since it is just a starting point from which people can slice off specific pieces if they choose. (Side note: I had been wanting to post something about a paper by Tom Hazlett and Vernon Smith that credits Coase with $17 billion in welfare losses foregone because of his influence on how spectrum now gets allocated.)

At the same session, Gillian Hadfield of USC had a paper arguing that the market for legal services has not kept pace with the needs of the new economy. I saw this a paradigmatic dynamic-transaction-costs story. Google is internalizing legal services for the same reason Chandlerian corporations in the nineteenth century internalized complementary production processes the market was not yet well enough developed to provide. As Hadfield pointed out, the inability of market institutions to supply these new kinds of legal services has a lot to do with the tight regulation the government exercises over the supply of such services.

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24 June 2010 at 8:20 am Dick Langlois 7 comments